China’s Draft E-Commerce Law Aims to Protect IP Rights

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By Mark Melnicoe

Multinational companies trying to protect their patents, trademarks and other intellectual property rights in the world’s largest online shopping market stand to benefit from China’s first comprehensive e-commerce law.

The draft law, issued Dec. 27 by the National People’s Congress, would codify increasingly strong protections for companies that have long complained about fake products undercutting their sales. Chinese authorities are collecting comment on the draft until Jan. 26. They have not said when a final version will be released, nor when the law will take effect.

When adopted, the law will regulate all aspects of e-commerce, including credit and payment systems and logistics and delivery services. It is designed to facilitate cross-border e-commerce so Chinese consumers can buy directly from overseas. Much of the law is consumer-friendly—putting the onus on companies that have flocked to online platforms to take advantage of China’s lucrative and growing e-commerce marketplace.

“Anything that adds IP protections to platforms is good, because most of our members sell through the platforms— including consumer brands and cosmetics,” Jake Parker, vice president of China operations for the U.S.-China Business Council, whose 195 members include Airbnb Inc., Apple Inc., Chevron, Pfizer Inc., Monsanto Co., Tesla Motors Inc., Visa Inc. and the Walt Disney Co., told Bloomberg BNA.

Pressure on Platform Operators

The draft law contains several articles protecting IP rights, including a core provision requiring platform operators, once they are made aware of a problem, to “take the necessary measures such as deleting, shielding, breaking the link, terminating the transaction and service.”

The draft carries fines of up to 500,000 yuan ($72,500) for violations, an amount some view as too low. However, that figure represents an administrative fine. Lawsuits can be brought that can result in triple damages for misleading transactions under consumer protection law, Michael Gu, a partner and IP lawyer at the Anjie law firm in Beijing, told Bloomberg BNA in a phone interview.

While the law may have drawbacks in practice, it illustrates the government’s seriousness about protecting businesses, Tai Guo, an attorney at the Kangxin law firm in Beijing, which specializes in IP, told Bloomberg BNA in a Jan. 18 phone interview. That alone puts “very high pressure” on providers and enforcers to make the necessary changes to avoid violations, he said.

The draft e-commerce law also follows recent case law in China that says “e-commerce platforms need to take actions to prevent infringement on their sites,” Andrew Sim, a partner and IP specialist at the Baker & McKenzie law firm in Beijing, told Bloomberg BNA in a phone interview. It offers, he said, “another avenue to pursue your rights against the infringer.”

Multinationals Flock to Alibaba’s Tmall

China has seen a huge increase in online shopping volume over the past few years. Turnover, or the total revenue from the sale of products or services, reached 3.8 trillion yuan ($547 billion) last year, according to IResearch Global, an online market-research firm based in Beijing and Shanghai.

Lured by this fast-growing e-commerce market, such multinational brands as Dell, Canon, Nike, Apple, Panasonic, Lancome and Clinique have flocked to Tmall, Alibaba’s massive platform enabling businesses to sell directly to millions of consumers in China. Tmall is Asia’s largest business-to-consumer (B2C) retail platform, and sales there can outdo those in brick-and-mortar stores.

“We see many clients that have a Chinese office, and they always sell products online by their Chinese subsidiaries,” said Samiko Sun, a trademark attorney at the Kangxin firm, who said most of her multinational clients have set up online stores on Tmall. “They can open the flagship store on Tmall, which is very popular according to current Chinese consumer habits.”

But online retail carries its own risks.

“It’s quite common for us to get a link from a client saying they have found an infringer online, ‘They are stealing the design,’” Guo said. In one case, an American client reported that its patented travel pillow was copied and offered for sale on a rival site. “This law will hit the online infringers badly,” he said.

One concern for American businesses, however, is the increased burden that would be placed on third-party express delivery companies to a level “beyond their capabilities,” the business council’s Parker told Bloomberg BNA.

“It requires all e-commerce packages to be completely screened for hazardous or illegal goods,” he said. “The volume of deliveries is so high in the China market” that the requirement would be onerous for delivery companies, he said.

More Than Legal Change Required

China’s improvement on IP enforcement comes during its push toward a more innovation-driven economy, a change that has been noticed by American companies, Parker said.

“Companies tell us that they continue to see modest progress each year,” he said. “As China’s companies become more innovative and develop their own intellectual property, there is a domestic government imperative to do more to protect all companies’ IP. More can certainly be done, but these trends are slowly moving in the right direction.”

Some practitioners, though, remain cautious about the draft law’s promise, saying millions of infringement cases can’t simply be stamped out with the formation of a new law.

“It puts more responsibility on the online platform,” said IP lawyer Gu. “But it seems like the e-commerce platform just needs to take some procedural measures, and it can be exempted from liability.”

Guo also sees that problem. He pointed to Taobao, Alibaba’s enormous consumer-to-consumer (C2C) online retail platform. “It’s hard for them to monitor everything and make sure there’s no infringement.” Even if Taobao gets notified about possible infringement, it needs staff to review documents and determine if infringement has actually occurred, he said.

“They will have to increase their budget for this,” Guo said.

Other Unfair Trade Practice Targeted

In addition to protecting IP rights, the draft law sets out specific actions targeting other unfair trade practices commonly seen online in China, including a ban on:

  •  misleading the public by using the same or a similar commercial logo as the main part of a domain name, website or other famous commercial sign without authorization, leading to market confusion;
  •  using false or confusing links;
  •  attacking or intruding into the network system of other business operators, maliciously visiting, intercepting or tampering with the network shops of other operators, or affecting normal business activities;
  •  using the electronic identity of a government department or a social organization without authorization, and misleading people;
  •  restricting the transaction, overcharging or adding unreasonable trading conditions by means of service agreements or other means; and
  •  engaging in other acts of unfair competition stipulated by laws and regulations.

To contact the reporter on this story: Mark Melnicoe in Shanghai at correspondents@bna.com

To contact the editor responsible for this story: Keith Perine at kperine@bna.com

For More Information

The draft e-commerce law can be found on the NPC website in Chinese at http://www.npc.gov.cn/COBRS_LFYJNEW/user/UserIndex1.jsp?ID=8189055

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